What already afflicts the state-owned oil refining sector has now begun to constrain the functioning of Coal India Limited (CIL). Under pressure to raise prices of coal to meet higher costs, the CIL management is likely to decide against it, thanks to signals from the ministry on not taking such a decision.
The government’s desire to control and delay pricing decisions for petroleum products has already led state-run oil marketing companies to project a revenue loss of over Rs 1,80,000 crore in the current financial year. While there is currently no such burden on CIL, prospects of the country’s monopoly coal producer incurring such losses are not remote anymore.
Underlying the two developments, experts point out, is a worrisome trend hampering the growth of the overall energy sector as state-owned companies are not allowed to sell products on economic logic dictated by market forces.
| COAL INDIA FINANCIALS FOR 2010-11 # Net Profit: up 12.9% at Rs 10,867 cr # Net Sales: up 12.5% at Rs 50,233 cr # 70% of sales (Rs 35,752 cr) came at notified price through FSAs. # 30% of sales (Rs 14,481 cr) came at market price through: e-auction 17% (Rs 8,810 cr) washed coal 7.8% (Rs 3,927 cr) MoU route 4.4% (Rs 2,212 cr) |
Though coal prices were decontrolled in 2000, the government continues to wield control over price increase decisions by CIL.
The CIL management has indicated that despite the financial burden the upcoming wage revision in July brings, no coal price increase is on the horizon.
“A rise in coal prices is unlikely even after the wage revision. We will try to offset the impact of the wage burden by the additional revenue from the last price increase in February,” said a senior executive from CIL, who did not wish to be identified.
The state-owned coal producer had last raised prices in February adopting a differential pricing strategy.
It increased prices by 30 per cent for non-regulated sectors such as cement, steel and paper.
While the regulated sectors of power and fertilisers were largely spared from the price hike, coal offered by Mahanadi Coalfields Ltd (MCL) was made costlier for the power sector by Rs 90 a tonne, or 20 per cent, owing to a parallel decision to bring parity in the prices of E&F grades, the most inferior grade.
Even after the increase, coal is being priced at a discount of around 15 per cent to the import parity prices. The price rise in February had translated into an additional revenue of Rs 650 crore for Coal India in the last financial year (2010-11).
For the current financial year ending March 2012, the Maharatna PSU would garner revenues to the tune of Rs 6,500 crore owing to the last increase.
“Apart from the revenue from the last price rise, we will try to minimise the wage burden by increasing volumes, improve offtake and liquidating pithead stocks of 70 million tonnes (mt),” the Coal India executive said.
Though the official denied any pressure from the government to raise prices, he agreed that despite decontrol of coal prices, the opinion of concerned stakeholders needed to be taken before taking a pricing decision.
“And if the stakeholder is a majority shareholder, its approval becomes important,” he said. The government currently holds a 90 per cent stake in Coal India after its divestment and subsequent listing on the bourses last November.
The petrol price decontrol happened in June last year. This was followed by a chain of increases in petrol prices beginning by a seven per cent rise in June, eight per cent in December and a further four per cent in January this year.
After January, no petrol price increase was announced even as international crude prices continued their upward rally. The next rise came only on May 15 after the assembly elections in Assam, West Bengal, Tamil Nadu, Kerala and Puducherry were over.
Unlike the oil sector, the impact of desisting from a price rise in the coal sector is likely to be more adverse owing to the lack of competition with CIL accounting for over 82 per cent of domestic production of 530 mt.
Chairman and Managing Director N C Jha had last month told Business Standard that the joint tripartite committee for wage revision was yet to be formed and the increase would not be available until the wage award was signed, which was expected to take two months.
CIL’s production during 2010-11 remained flat at 431 mt. The company posted a 12.9 per cent jump in net profit for the full year at Rs 10,867 crore owing to higher realisation from selling coal at market price.
Around 70 per cent — Rs 35,700 crore —of the company’s overall sales of Rs 50,233 crore came by selling coal at the notified price of Rs 960 per tonne through Fuel Supply Agreements.
The rest 30 per cent was sold at the market price through e-auction (17 per cent), increased sales of washed coal (7.8 per cent) and coal sold through memoranda of understanding (MoUs) (4 per cent). CIL sells coal under the MoU route to customers willing to buy premium quality coal (A and B grade) at market prices.
Experts agree that the current under capacity of infrastructure in energy sectors is a result of the half-hearted reforms flowing from the government’s will to control pricing decisions which hampers investor confidence.
“The government, no doubt, has to play a role in ensuring transparent availability of natural resources. But this does not mean that it has to be a majority owner in companies. Instead, regulators should be set up to protect consumer interest. The decontrol process has not translated into reality owing to the government’s influence,” said Gokul Chaudhri, partner, BMR Advisors.
